Proposed SEC Rule Will Hurt Whistleblower Program

sec-building-headquartersThe rewards for SEC whistleblower can be potentially limited for a successful qui tam lawsuit. The SEC is proposing controversial amendments to its whistleblower program. Under current directives, a whistleblower who provides information that leads to an SEC enforcement action receives 10%-30% of the recovery by the agency. This monetary provision incentivizes potential whistleblowers to disclose rather than remain silent.

By awarding proportional monetary payouts to the persons responsible for the uncovering of fraud and illegality, the SEC provides adequate motivation for an employee with knowledge of large-scale fraud to report. This proposed rule threatens that incentive. When a SEC whistleblower loses the guarantee for a large payout, they may be inclined to stay quiet. It takes a special person to instead stand up for what it is right—that pool of people grows much larger if there is the prospect of a monetary award.

The proposed amendments passed by a Commissioners vote of 3-2. Commissioner Kara Stein, who voted against the amendments, said that “practically speaking, this means the Commission could reduce the reward if, in its sole discretion, it thinks the award is too large.”

The SEC has previously reported that whistleblower disclosures have led to over $1.4 billion in financial recoveries, including $415 million from Merrill Lynch earlier this year.

As Stein notes, the Commission would have the power to enlarge or reduce awards depending on their analysis of a set of factors. While this is beneficial for awards under $2 million, which currently make up around 60% of awards, the vagueness of the mandate could potentially harm whistleblowers. For awards over $30 million, SEC whistleblowers could see their payouts reduced due to “the value of the whistleblower’s information and the personal and professional sacrifices made in reporting the information.” In other words, the Commission has discretion as to which whistleblower disclosures are more or less meritorious. This is a slippery slope. It could create an environment where whistleblowers that deserve to get an award are denied due to institutional or political factors.

Commissioner Hester Pierce noted in her statement that, “the most important part of our Whistleblower Program, of course, is the whistleblowers themselves, who bring to our attention securities law violations that otherwise might not come to light for years or even forever.”

Before enacting any new rules, it is critical that the SEC understand the potential damage that these changes could deal to its whistleblower program.

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